In this paper we set out the welfare economics based case for imposing cartel penalties on the cartel overcharge rather than on the more conventional bases of revenue or profits (illegal gains). To do this we undertake a systematic comparison of a penalty based on the cartel overcharge with three other penalty regimes: fixed penalties; penalties based on revenue, and penalties based on profits. Our analysis is the first to compare these regimes in terms of their impact on both (i) the prices charged by those cartels that do form; and (ii) the number of stable cartels that form (deterrence). We show that the class of penalties based on profits is identical to the class of fixed penalties in all welfare-relevant respects. For the other three types of penalty we show that, for those cartels that do form, penalties based on the overcharge produce lower prices than those based on profit) while penalties based on revenue produce the highest prices. Further, in conjunction with the above result, our analysis of cartel stability (and thus deterrence), shows that penalties based on the overcharge out-perform those based on profits, which in turn out-perform those based on revenue in terms of their impact on each of the following welfare criteria: (a) average overcharge; (b) average consumer surplus; (c) average total welfare.
In Motorola Mobility LLC v. AU Optronics, No. 14-8003, 2014 WL 1243797 (7th Cir. Mar. 27, 2014), the Seventh Circuit Court of Appeals offers an interpretation of the Foreign Trade Antitrust Improvements Act (FTAIA), 15 U.S.C. §6a that would have significant implications for the right to sue foreign companies under the Sherman Act. The FTAIA states that the Sherman Act “shall not apply to conduct involving trade or commerce … with foreign nations.” but provides some exceptions to that rule. The exception of relevance to Motorola Mobility is that foreign companies are liable under the Sherman Act when their conduct has “a direct, substantial, and reasonably foreseeable effect” on U.S. commerce and “such effect gives rise to a claim under [the Sherman Act].” Motorola Mobility involves an alleged cartel of foreign manufacturers of liquid crystal display (LCD) panels used in mobile phones. In a decision written by Judge Richard Posner, the LCD manufacturers were found not liable because their conduct did not have a “direct” effect and thus did not fall into the above-stated exception to the FTAIA: The alleged price fixers are not selling the panels in the United States. They are selling them abroad to foreign companies (the Motorola subsidiaries) that incorporate them into products that are then exported to the United States for resale by the parent. The effect
Current Antitrust Fines May Increase Distortions in the Economy By: Vasiliki Bageri, Athens University of Economic and Bussiness Yannis Katsoulacos, Athens University of Economic and Bussiness Giancarlo Spagnolo, Stockholm School of Economics-SITE, DEF-Tor Vergata & CEPR Introduction Competition policy has become a prominent policy in all developed economies and many developing ones, from Brazil to India. Indeed, the available evidence suggests that in countries where law enforcement institutions are sufficiently effective, a well designed and enforced competition policy can significantly improve total and labor productivity growth. The emphasis of the italic already suggests the focus of the present piece. It is already well known that the private enforcement of competition policy can give rise to large distortions: since competition law is enforced by Judges and not by economists, it is easy for firms to use strategically the possibility to sue under the provision of competition law to protect their market from competitors rather than to protect competition. A well-known example is the Digital Equipment Corp. vs. Intel Corp case. In this case there is strong evidence that Digital exploited antitrust law to prevent Intel from developing competing technology in the microprocessor market. That is why not only was Digital taking Intel in a patent-infringement suit but it was doing it in a way to gain maximum publicity so as to
There is a growing concern among some scholars and practitioners that penalties for companies participating in a cartel have become excessive in the sense that they are more than sufficient to deter and may be causing social harm. Here I will argue that, even if there is validity to those claims, it is imprudent to begin lightening up on enforcement. There is no doubt that “cartel fines from public enforcement … are staggering” and that, when a cartel operates in a jurisdiction allowing for private customer damages, the amounts can be vastly higher than staggering, shall we say gargantuan? Of course, the incremental profits earned through collusion may as well be staggering or even gargantuan. Thus, any assessment of whether penalties exceed or fall short of what is necessary to deter cartel formation requires a careful comparison of penalties with those profits while taking account of the likelihood of cartel members ever paying those penalties. Recently, some studies have pursued such an analysis. Using a traditional approach that compares the profit from colluding with the expected penalty (which equals the penalty multiplied by the probability of discovery and conviction), Connor and Lande (2012) argue that penalties are in the under-deterrence region. However, a different conclusion is reached in Allain, Boyer, and Ponssard (2011) who take issue with the method and estimated overcharges
I recently stressed that the EU Damages Directive will not be a normative island; it will interact with a swelling body of preliminary rulings under Article 267 TFEU (‘Perchance to Dream’, http://papers.ssrn.com/sol3/papers.cfm?abstract_id=2371338). One case to watch closely will be Case C-557/12, Kone and others. On 30 January 2014, Advocate General Kokott delivered her Opinion. If the ECJ follows her, the judgment will affect antitrust litigation before national courts in Europe because (i) it will harmonize certain principles governing damages actions, and (ii) it will imply greater potential exposure to damages relative to a contrary outcome. The question submitted by Austria’s Supreme Court, the Oberster Gerichtshof, was this: “Is Article 101 TFEU […] to be interpreted as meaning that any person may claim from members of a cartel damages also for the loss which he has been caused by a person not party to the cartel who, benefiting from the protection of the increased market prices, raises his own prices for his products more than he would have done without the cartel (umbrella pricing), so that the principle of effectiveness laid down by the Court of Justice of the European Union requires grant of a claim under national law?” So: can a plaintiff recover damages from cartelists for an overcharge even if it is not imposed by the defendants but by a non-colluder